The UK economy is in a poor state. Growth remains limited or non-existent and living standards have yet to show signs of improvement. Despite encouraging signs from measures to improve funding for businesses and mortgages, the impact remains limited. Yet Labour continues to score poorly in polling on ability to manage the economy. Conservative economic policy remains vulnerable because it is failing. However, Labour cannot simply wait for an improvement in how it is perceived. It must tackle the issue of spending and develop the One Nation theme further. We can talk to people about an economic policy which combines optimism with credibility.
The UK economy did not grow last year. That is the main message we have from the first estimate of GDP for the fourth quarter of 2012, which showed the economy shrinking by 0.3 per cent. The estimate will be revised as more data comes in, and, in any event, seems distorted by a shutdown of North Sea oil production. Nevertheless, this snapshot of the UK economy is not encouraging. It points to challenges for Labour as we build a One Nation economic policy.
Leading indicators of economic growth point to an uncertain outlook. The purchasing managers indices saw an improvement last month in the manufacturing sector but a fall in the larger services sector. On balance they suggest a flat-to-slowing economy as we entered the first quarter of 2013. Many commentators have pointed to the strange case of missing UK productivity. Unemployment, while down to 7.7 per cent, remains stubbornly too high but employment has grown significantly and at a faster rate than the recovery from the 1990s recession. The result has been that productivity, on current measures, has fallen. Future upward revisions of GDP may change this. It is also possible that the labour market is behaving differently this time around, with companies hoarding labour rather than making people redundant. The financial crisis struck suddenly in 2008 and across most sectors at once, which may have encouraged firms to hold fast and wait for better times. In addition, as the Economist has suggested
, banks may be keeping inefficient companies alive, and therefore employing people, to avoid taking a loss on bad debt themselves. The risk is that when things improve, we may see restructuring and redundancies but little further pick up in employment as current workers take up the slack as business improves.
Inflation, at 2.7 per cent, or 3.1 per cent on the older retail prices index measure, is not at the low levels a financial crisis and deep recession would imply. Wages have grown at a slower pace, which means that living standards have been eroded for many years. Households with mortgages have seen mortgage costs fall but food and fuel prices rise. In general, the prices that have risen have been due to factors external to the UK or due to government action (eg transport fares, tuition fees). The result has been that income available for discretionary spending (ie after bills) has fallen. The outlook on this front looks brighter into 2013 unless inflation rises much further. However people need to feel more confident in the future and not simply have more money in their pockets now. Many continue to be concerned about debt levels. The Office for National Statistics
reports that in 2008-10 almost half of people with debt were worried about it.
The Bank of England’s recent credit conditions survey
showed that efforts to boost liquidity are having an effect. Credit conditions improved in the last quarter and the outlook for the next three months was for further improvement. Credit available for households and businesses had increased. However, lenders were continuing to apply strict criteria for lending and demand for credit was limited in the corporate sector. The suggestion is that it might take only a small boost to confidence, including within the banking sector, for borrowing to increase. The key question is, how can that confidence be boosted?
The overall impression one gets is of the UK economy neither particularly growing nor shrinking. In other words, flat performance (no one knows what the UK’s trend rate of growth actually is). The problem is that without growth the government’s annual borrowing is not reduced significantly. This is why the George Osborne keeps extending the period of austerity. Compared to his original plans, he now intends to borrow more and cut more (beyond the next election). Labour’s challenge is to be clear where we will focus our opposition. For example, we currently say the chancellor has failed because he has missed his targets for cutting the deficit, but that we would actually cut spending more slowly and borrow more in the short term, to deliver more growth in later years. It is not a snappy message.
There is a real danger that the years of austerity, both in the UK and elsewhere, have rendered less effective any further stimulus. Plans to cut came in too soon. The risk is that we have a period of some growth, but not enough, with debt still at high levels, with regular but ineffective government growth plans. Labour has an opportunity to build upon One Nation themes to build a convincing economic message. However, we must also tackle the fact that we have more to do to build our economic credibility.